The multiplier for a futures contract on the stock-market index is $250. The mat
ID: 2725089 • Letter: T
Question
The multiplier for a futures contract on the stock-market index is $250. The maturity of the contract is one year, the current level of the index is 700, and the risk-free interest rate is 0.5% per month. The dividend yield on the index is 0.2% per month. Suppose that after one month, the stock index is at 708.
a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly.
b. Find the one-month holding-period return if the initial margin on the contract is $15,000.
a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly.
b. Find the one-month holding-period return if the initial margin on the contract is $15,000.
Explanation / Answer
Answer (a) Initial Index Price = 700 risk free rate = 0.5% p.m. Dividend Yield = 0.2% p.m. After one month Index Price = 708 Initial future price of index = 700*(1+ 0.005-0.002)12 = 725.62 After one month future price of index = 708*(1+ 0.005-0.002)11 = 731.72 Increase in the future price = 731.72-725.62 = 6.10 Cash flow will be =6.10*250 = $ 1525 Answer b One month holding period return Margin depsoit = $ 15000 Return in one month = $ 1525 = 1525/15000*12 10.17% p.m. Return in one month =10.17% p.m.